It's surprising how few people know that there are actually 30 different levels of credit scores. The internet can be misleading when it comes to finding the best credit score for yourself. The vast amount of information available online can be confusing, at best, and downright misleading at worst. My name is Joe Mahlow and I've been working in the financial literacy and credit repair field for over fifteen years. My ultimate goal is to provide clear and unbiased advice on various topics, such as credit scores, to help you be informed. I've already enabled more than twenty thousand of my clients to improve their credit scores and I’m eager to do the same for you. So, let's navigate through the complexities of credit scores together.
Contents:
Credit Score Types and Their Differences
Determining a Good Credit Score
What is a suitable credit score to obtain a mortgage?
Determining the Credit Score Range for Car Purchases
Ways to Improve Your Credit Score
Joe's Advice on Improving Your Credit Score
Credit Score Types and Their Differences
Understanding credit scores is essential for managing your finances. There are two primary credit scoring models: FICO and Vantage. Knowing the differences in how they calculate credit scores is vital.
FICO Credit Score
FICO is the most widely used credit scoring model. With eight different FICO models, each providing a different credit score based on your credit report, it can be confusing. Lenders pull a specific FICO model based on the type of credit you are applying for. For example, a mortgage lender will most likely pull your FICO 5 credit report, whereas a credit card company will most likely go with your FICO 8 credit report. The different models exist because each credit report has a different "weight," with some factors carrying more importance than others.
Vantage Credit Score
The Vantage Score was developed by the three major credit reporting agencies to compete with FICO. It is a newer model and is mainly used by credit monitoring websites to offer free credit report copies. While FICO remains the dominant scoring model for lenders, Vantage is gaining popularity in some sectors, like personal loans and auto lending.
Accuracy of Vantage Score
The Vantage Score is accurate within its intended context. However, since it is not widely used for lending purposes, it may not reflect your actual lending score accurately. It is best to use your Vantage score as a general idea of your FICO score. Credit reporting agencies are critical data collection agencies, and if they have the data, they have the upper hand in providing the best scoring data.
In conclusion, understanding credit scores is crucial, and knowing the differences in credit score models can help you manage your finances better. To have a clear picture of your scores, sign up for an account at myfico.com to view all your different credit scores.
Determining a Good Credit Score
Scoring models, such as FICO and Vantage, use a range of 350 to 850. The lowest possible score is 350, whereas the highest possible score is 850. As you aim to attain the highest score possible, it's essential to be aware of your standing throughout the process. This guide provides some important score thresholds.
1. 620 or below:
If you have a score of 620 or lower, you have bad credit. You likely have a history of adverse credit, high-balance credit cards, or no credit cards at all. To improve your score, it's crucial to make timely payments and maintain ten active revolving credit accounts. Credit Builder Card or OpenSky Credit Card can help you build your credit. Once you reach this range, you can qualify for an FHA home mortgage.
2. 640-680:
If your credit score falls between 640-680, it's considered fair for good credit. It means you have established credit, but you may have derogatory marks or accounts on your credit, high credit card balances that you need to pay down or newly opened accounts. The latter can temporarily lower your scores.
3. 740+:
If your score is 740 or above, you are in the group called "super-prime." You are amongst the 20% of the American population that has this score. Your excellent credit score will provide you with the best interest rates for most loans. Ensure you keep your credit card accounts paid and always submit timely payments. Keep up the great work!
What is a suitable credit score to obtain a mortgage?
The answer to this query is dependent on the type of mortgage loan you intend to apply for. The majority of mortgage loans have comparable requirements and regulations backed by federal authorities, though some may differ. Typically, there are three types of mortgage loans: FHA loans, VA loans, and conventional loans, which is the most popular type of mortgage loan and the best "savings" outside of a VA loan.
Conventional Loans
Unlike other mortgage loans, conventional loans do not require PMI, which is an added expense that raises your down payment or monthly payment. PMI protects your lender in the event of payment defaults. As a result, such loans have lower down payment and better interest rate requirements. A typical credit score requirement is 640, and a debt-to-income ratio of no more than 43%.
FHA Loan
If you have lower credit scores, ranging typically between 580-619, you might be looking for an FHA mortgage loan. Although FHA loans may be an option for you, it is important to shop around for lenders who offer better financial options. You will keep PMI for at least 11 years on an FHA loan, which is an added expense to your monthly mortgage payment. The debt-to-income limit for this loan is typically higher, up to 50%, enabling you to purchase additional properties if you have a lower income. The down payment on FHA loans is lower, at 3.5% of the purchase, allowing you to obtain a loan with less cash outlay, but usually a higher interest rate.
VA Loan
The VA Loan doesn't technically have a credit score requirement, but they will check for prior defaulted loans and government-owed past-due debts before granting approval. Qualification for this loan is based on military service. If you have served in the US military for at least 181 days, 90 consecutive days during wartime, 6 years with the National Guard, or if your military spouse lost their life during active duty. This mortgage loan typically has the best interest rates and does not require a down payment. Therefore, I believe that the VA Loan is an excellent way to support our veterans.
Determining the Credit Score Range for Car Purchases
While applying for a car loan, it’s crucial to focus on your credit history rather than your credit score. Although a good credit score could help, it doesn't play a significant role in determining interest rates. As lenders assess the risk factors associated with loan extension, they analyze the past and current credit history of applicants. Hence, individuals with a higher likelihood of defaulting on loans due to previous non-payments or repose may experience difficulty in acquiring car loans. However, people with bad credit can still avail of loans under specific conditions, such as paying higher down payments and dealer fees to help the dealership cover the risk. For effective car purchasing on credit, individuals need equity or a down payment.
Credit score ranges for buying a new vehicle
Although there isn't a specific credit score for loan approvals, a credit score over 680 is considered ideal. A lower score may increase the interest rate levied on the loan due to the risk presented. By comparing credit score and interest rate data, it's evident that the higher the credit score, the lower the cost of interest payments. For example, a person with a 720 credit score or above can expect to pay approximately $5,500 in interest on a loan, while someone with a score of 580 may pay $15,300. Ultimately, the importance of credit score lies in decreasing interest rates and improving the overall score.
Ways to Improve Your Credit Score
There are several practical actions you can take right now to enhance your credit score with minimal effort. However, keep in mind that it takes time to establish a good credit score, and there is no instant fix. Remember to have patience as impulsive decisions can lead to further problems.
Here are some things you can do to improve your credit score:
1. Open revolving credit accounts:
To maximize your credit scores, obtaining revolving credit is one of the best options. It may be challenging for someone with limited credit history or someone repairing their credit, to get approval for a large loan. However, secured credit cards such as Open Sky or Credit Builder Card, which focus on your ability to make timely payments, are good options. This type of credit accounts for 30–35% of your overall credit score and helps you build it quickly. Always pay your balance on time and keep it at $5–$10 each time you make a payment, using the card for small purchases only.
2. Request a credit limit increase:
Many credit card companies allow you to request a limit increase, which can increase your overall credit limit and potentially reduce your credit utilization percentage, one of the factors that can affect your credit scores. To request an increase, call your credit card company and ask for a "Credit Limit Increase." If approved, it usually takes 7-15 months of solid payment history.
3. Pay down your balances:
The goal is to keep your balances low; you are not required to mete out your credit cards every month. Use them for small purchases and leave a balance of $1–$5 on your credit cards when you pay the bill. If you have an outstanding balance and are unable to pay your credit cards off due to financial constraints, create a plan to pay an "x" percent of your paycheck per month toward your credit card. It is a mistake to pay off your debt and immediately go back to high balances, which can negatively impact your credit score. Be mindful of your credit card usage, and limit it to only essential purchases to avoid interest charges.
Lastly, remember that gradually improving your credit score takes time and patience, but with these tips, you can move towards a healthy credit score.
Joe's Advice on Improving Your Credit Score
We've all been in a situation where our credit score is not where we want it to be. However, by taking a serious approach to your present credit situation and dedicating time and effort to improve it, you will see significant developments in your credit score in no time. Many individuals with poor credit get stuck in a cycle of credit problems that seem impossible to get out of. It takes hard work to build a strong credit score, but those who prioritize it and concentrate on their spending habits will ultimately succeed. One way to start is by creating a budget and working towards correcting any harmful spending habits that you have. This method will directly affect your credit score. If you're looking for a guide or need assistance with your credit score or credit restoration, please contact our office at www.asapcreditrepairusa.com.